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Question: My son just graduated from Colorado State and gets offers
almost every day for a credit card. What do you think about credit
cards for a young man?
Answer: Credit used wisely offers many benefits. With a credit card you
don't have to carry large sums of cash. Making hotel and car rental
reservations by phone, often requires a credit card to guarantee the
reservation. Sometimes emergencies occur, credit cards allow you to
cover your expenses and pay when your bill is due. Credit cards also
offer benefits such as frequent flyer miles, discounts on automobiles,
hotel rooms and other perks.
Credit is not an advantage, however, when individuals use credit to
stretch their income and add credit charges to their bill every month.
The Federal Reserve reports that 47.7 percent of households using credit
cards pay interest charges each month.
In 1996, bankruptcies exceeded 1 million, the highest level of any time
in history. Credit card delinquencies were reported at their highest
level since 1974, when the American Bankers Association began keeping
this data.
All of this sounds pretty dismal. The lesson, however, is not to avoid
credit; but to learn to use it so it works for you. You can help your
son learn good Consumer skills now, and he will reap the benefits of
using a credit card.
1. Some credit cards have annual fees and high interest rates.
Suggest that your son check around until he can find a card with no fee,
and a low interest rate. Encourage him to pay off his balance each
month. No one plans to add 19 percent to the price of a purchase --
which is exactly what you do when you pay interest on your unpaid
balance. Contact Bankcard Holders of America, 524 Branch Ave., Salem, VA
24153, they will send a list of low-rate or no-fee cards for $4.
CardTrak, P.O. Box 1700, Frederick, MD 21702 (800-344-7714) will send a
report for $5.
Update, April 1998: Bankcard Holders has closed its doors. Debt Counselors of America is a non-profit, Internet-based debt counseling agency at www.dca.org.
2. Ignore ads which lure Consumers with low interest rates, which will
expire in six months or so.
3. Help your son learn to balance his income and expenses by
suggesting that he deduct his credit expenditures from his spending plan
everytime he buys something with credit. This ensures there are no
surprises at the end of the month due to spending much more than he
remembers.
4. Alert your son to the fact that credit card issuers love folks who
pay only the minimum payment, typically only 2.5 percent of the balance.
If your son maxes his card at $500 and makes only the minimum payment,
with an 18 percent interest rate, it will take him seven years to pay
off the balance and he will have paid $365 in interest - almost as much
as the $500 credit.
5. Explain to your son that credit is an asset that is as important as
stocks and gold. Individuals with good credit can often negotiate
better Consumer loan rates for cars, furniture and other major
purchases. A good credit history makes it much easier to get a home
mortgage. Credit is often checked when individuals inquire about
renting. Poor credit is a danger signal that may indicate you are an
undesirable tenant.
Your son shouldn't be afraid of using credit. Good credit is a
lifelong asset used for convenience and emergencies.
For more information, contact your local
Colorado State University Extension office.
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